Power IPOs: Yet to deliver

Most power sector companies which came out with an IPO in 2008 are trading below or near their issue prices. Since January 2008, the BSE Power index has lost almost 50 per cent, compared to 10 per cent correction in he Sensex.

Experts said most companies took the advantage of the positive sentiment boosted by huge opportunities in the power sector, and accordingly, sought higher valuations, which later got corrected because many of these companies could not deliver on the business front. Issues which have led to project delays include environment clearance, fuel linkages and rising cost of capital.

Since some of these issues might not get resolved in a hurry, analysts remain cautious and prefer established players like NTPC, Tata Power and Power Grid, which have good revenue and profit visibility, relatively better fuel security and a diversified portfolio of power off-take.

VALUATIONS CORRECT
The high valuation that many power companies demanded during the IPO has been the key disappointing factor for investors. In some cases, while valuations appeared reasonable, the projections of future capacity were aggressive and haven’t been achieved.

For instance, when Adani Power launched its IPO, it was valued at Rs 3.3 crore per megawatt based on estimated FY12 capacity (about 6,600 mw). Since its listing in August 2009, Adani Power’s operational capacity has increased by eight-fold to 2,600 mw (expected to rise to 4,600 in FY12). The company posted a profit of Rs 513 crore in FY11, compared to a loss of Rs 7.18 crore in FY08. However, its share price is hovering near its IPO price.

On the other hand, JSW Energy, at the upper band of Rs 115, was asking for a market capitalisation of almost Rs 6 crore per mw based on its FY12 estimated capacity. Most IPOs were valued at 3-4 times their book value and market capitalisation was Rs 3-6 crore per megawatt of expected operational capacity in FY12.

“Generally, valuations shoot up when there is hype about the sector and correct once they reach ground reality. The power sector valuations have corrected from overly optimistic to currently fairly pessimistic. Investors earlier were more inclined towards the incremental capacity rather than the risks associated with the execution,” says S Krishna Kumar, who is heading the Energy Opportunity Fund at Sundram Mutual Fund.

EXECUTION, A CAUSE FOR CONCERN
The biggest challenge before the companies has been timely execution of projects. The government as well as private sector companies are running behind schedule leading to lower growth visibility.
 

LACKING POWER
	Price (Rs)			Duration In years	P/BV
	Issue	Current	% chg
Indiabulls Power	45	17.0	-62.3	1.5	0.9
NHPC	36	24.9	-30.8	2.0	1.1
JSW Energy	100	76.3	-23.7	1.5	1.9
SJVNL	26	22.0	-15.4	1.0	1.3
Adani Power	100	110.0	10.0	2.0	3.8
Orient Green	47	14.7	-68.7	10-mth	0.5
KSK Energy	232	104.0	-55.2	3.2	1.4
Reliance Power *	281	111.0	-60.5	3.5	1.9
% change is over the IPO price  BV = Book value for FY 11                                      * Reliance Power IPO price adjusted for bonus issue

Power projects of Adani Power (Tiroda-1,980 mw), NTPC (Uttarakhand-600 mw), JSW Energy (Ratnagiri and Rajwest units) and Reliance Power, among others, have got delayed for several reasons, including environment clearance, fuel linkage and financial closure. Given the medium-term visibility and cost-related issues, analysts are not bullish either on Reliance Power or Orient Power.

Companies like Indiabulls Power are yet to have operational power capacity and have lost more than 60 per cent of its market capitalisation. State hydro-power utility, SJVNL, did offer its shares at reasonable valuations but did not add any capacity impacting growth.

NHPC’s share price, too, has fallen by more than 30 per cent since its listing as its projects got delayed. It added about 120 mw over two years post listing. The delays have also led to cost overrun for many companies, especially in the high interest rate scenario affecting profitability.

IMPACT ON RETURNS
High valuations were also a result of many companies hoping to generate a higher return on equities ranging 25-60 per cent (against 14-16 per cent regulated returns) due to their exposure to merchant power (wherein realisations were around Rs 6 per unit about two years back).

However, during the first quarter of the current fiscal, spot electricity rates stood around Rs 3.1 per unit. Supply of merchant power has more than doubled to about 5,000 mw in FY11, compared to the previous year. On the demand side, poor financial conditions of the SEBs has also led to lower off-take of power thereby impacting demand, plant utilisation and spot tariffs.

According to analysts, companies like JSW Energy and Adani Power have large exposure to merchant power (based on the operating and under construction capacities) at about 47 per cent and 27 per cent, respectively, and are likely to be the most affected.

Recently, analysts downgraded JSW Energy’s earnings estimates by about 30-40 per cent on account of lower operating rates, project delays and higher fuel costs due to coal purchase from the spot market. Due to shortage of domestic coal, many companies had to rely on costlier imports or spot market, leading to pressure on margins and return on equity.